Socialist market economy

Socialist market economy
Socialist market economy
Simplified Chinese 社会主义市场经济
Traditional Chinese 社會主義市場經濟

The socialist market economy or socialist market economy with Chinese characteristics is the official term used to refer to the economic system of the People's Republic of China after the reforms of Deng Xiaoping. It is also referred to as socialism with Chinese characteristics. Similar though much less extensive reforms were undertaken in Vietnam, where the economic system is called the Đổi Mới (lit. "New Age", trans. "Renovation"), respectively. It consists of a mixture of economic planning with a market economy.



Deng Xiaoping, after the failure of the Great Leap Forward (1958-1961), was willing to consider capitalist methods of economic growth so as to revitalise China's economy. However, in doing so, he remained committed to centralized control and the one-party state.

The socialist market economy is a concept first proposed by Deng Xiaoping in order to incorporate the market into the then planned economy in the People's Republic of China, then Đổi Mới in Vietnam.[1] Following its implementation, this economic system has supplemented the centrally planned economy in the People's Republic of China, and the high growth rates in GDP during the past decades have been attributed to it. Within this model, privately owned enterprises are a major component of the economic system, along with the central state-owned enterprises and collective / township village enterprises.

However, the fundamental distinction between the Chinese and Western mixed-market economy models lies less in the implementation of the mixed economic model but rather in the underlying authoritarian political philosophy, which eschews Western notions of democracy, individual rights, and the rule of law.[2]

The private sector

Most of the economic growth in China is attributed to the private sector,[3] which grows at twice the official rate of increase and is continually expanding.[citation needed] However, the size of the private sector is notoriously difficult to pin down as the private sector is likely underestimated by state officials in calculation of GDP because of its propensity to ignore small entrepreneurs and private enterprises being not registered.

In addition, private entrepreneurs have a propensity to claim to be collectives and under-report the size of their business.[3] The private sector generated approximately 70%[4] of GDP in 2005, a figure that might be even greater considering the Chengbao system, in which entrepreneurs operate assets which nominally belong to the government. The state retains control of some strategic industries.[5]

Numerous sectors such as health care and education that were previously run by the state were privatised during the formation of China's current market economy.[6][7] The growth of the private sector is indeed phenomenal, as shown by this quote below:

What is more, if the analysis is restricted to companies that regularly produce statistical reports (those with annual sales of over 5 million Chinese yuans), then the private sector's share of value added has risen from 28 per cent to 52 per cent between 1998 and 2003. Further, in 1998, the private sector contributed a larger share of value added in only 5 out of 23 "non-core" manufacturing industries. By 2003, this had risen to cover all 23 of these industries. In half of those industries, private firms produced more than three-quarters of output. Overall in these 23 industries, the private sector is estimated to employ two-thirds of the labour-force, contribute two-thirds of valued added, and is responsible for over 90 per cent of their exports. To top it all, over a quarter of all industrial output is now reportedly produced by private foreign-owned companies.[8]

The state sector

By 2005 the market-oriented reforms, including privatisation, was virtually halted and partially reversed.[9] In 2006, the Chinese government announced that the armaments, power generation and distribution, oil and petrochemicals, telecommunications, coal, aviation and shipping industries had to remain under "absolute state control" and public ownership by law.[10] The state retains indirect control in directing the non-state economy through the financial system, which lends according to state priorities. Liberalization continues to be rolled back in the state-sector by the consolidation of state enterprises into large "national champions" with the goal of consolidating efforts and creating internationally-competitive national industries.[11] By 2009 the government considered a state insurance scheme to expand healthcare coverage.[12]

The state sector is concentrated in the 'commanding heights' of the economy with a growing private sector engaged primarily in commodity production and light industry. Centralized directive planning based on mandatory output requirements and production quotas has been superseded by the free-market mechanism for most of the economy and directive planning in large state industries.[13] A major difference from the old planned economy is the restructuring of state companies along a commercial basis, with the exception of 150 large state-owned enterprises that remain and report directly to the central government, most having a number of subsidiaries.[14]

These state enterprises have high autonomy in that they can choose their own CEO's, keep their own profits, but differ from the private firms in that they get a bailout if anything goes wrong. By 2008, these state-owned corporations have became increasingly dynamic largely contributing to the increase in revenue for the state.[15][16] The state-sector led the economic recovery process and increased economic growth in 2009 after the financial crises, due to the fact that most of the Chinese stimulus package was directed towards these state owned firms.[17]

This type of economic system is defended from a Stalinist perspective which states that a socialist planned economy can only be possible after first establishing the necessary comprehensive commodity market economy, letting it fully develop until it exhausts its historical stage and gradually transforms itself into a planned economy (the Stalinist Two-Stage theory of revolution).[18] Proponents of this model distinguish themselves from market socialists, who believe that economic planning is unattainable, undesirable or ineffective at distributing goods, viewing the market as the solution rather than a temporary phase in development of a socialist planned economy.


The transition to a socialist market economy began in 1978 when Deng Xiaoping introduced his program of "Socialism with Chinese characteristics". Initial reforms in decollectivising agriculture and allowing private businesses and foreign investment in the late 1970s and early 1980s later led to large-scale radical reforms, consisting of privatisation of the state sector, liberalisation of trade and prices, and dismantling the welfare state in the late 1990s. Since the beginning of Deng Xiaoping's reforms, China's GDP rose from some 150 billion USD to more than 1.6 trillion USD, with an annual increase of 9.4 percent.[19] As of 2004, 50% of the remaining state-owned enterprises have been transformed into joint-stock companies.[19]

The private sector's share of the GDP rose from less than 1% in 1978 to 70% by 2005, a figure that is still increasing. Due to the poor performance of traditional state enterprises in the market economy, China embarked on a massive restructuring program of privatisation. Under this scheme, the state retains ownership and control of large enterprises but the central government has little direct control over the operations of state-owned enterprises.[20] Recently the Conservative Hu-Wen Administration rolled back many of Deng's reforms, leaving observers dubbing 2008 the "third anniversary of the end of reform.[21]


Despite the official stance of socialism, the "socialist market economy" is often described as one hybrid type of both free market and socialism by economic observers.[22] This criticism also comes from orthodox Marxists, who criticise it on the grounds that the socialist market economy restores capitalist commodity relations and production while further dis-empowering the working class, leading to a sharp increase in social inequality and the formation of a growing capitalist class.[23] The political ideology term itself have often been mentioned for scapegoating bearing other issue like currency, energy, fair trade and environment change caused during economic and technology development.[24]

Orthodox Marxists believe a socialist commodity economy is contradictory. Other socialists believe the Chinese have embraced many elements of market capitalism, specifically commodity production, resulting in a capitalist economic system.[25]

While some industries remain under state ownership, its scope has been reduced substantially in recent years due to the privatisation program since the late 1990s.[20] As a result, output of the Chinese economy has increased between 1989 and 2001;[5] the privatisation program continues.[7] While the free-market has largely supplemented central economic planning in the Chinese economy, the Chinese government still guides overall national economic development through "indicative planning".[26]

Proponents of the socialist market economy compare it to the New Economic Policy in Soviet Russia that introduced market-oriented reforms while maintaining state-ownership of the 'commanding heights' of the economy. The reforms are justified through the belief that changing conditions necessitate new strategies for socialist development.[27] According to Li Rongrong in 2003, chairman of the State-Owned Assets Supervision and Administration Commission of the State Council,

Public ownership, as the foundation of the socialist economic system, is a basic force of the state to guide and promote economic and social development and a major guarantee for realising the fundamental interests and the common prosperity of the majority of the people… The state owned economy has taken a dominant place in major trades that have a close bearing on the country’s economic lifeline and key areas, and has propped-up, guided and brought along the development of the entire socio-economy. The influence and control capacity of SOEs have further increased. State owned economy has played an irreplaceable role in China’s socialist modernisation drive.[5]

See also


  1. ^ Vuong, Quan-Hoang. "Financial Markets in Vietnam's Transition Economy: Facts, Insights, Implications" (Feb 2010) ISBN 978-3-639-23383-4, VDM Verlag, 66123 Saarbrücken, Germany.
  2. ^ Yu, Verna (7 September 2010) "Shenzhen speeches show divide on 'political reform'", South China Morning Post
  3. ^ a b China since Tiananmen: the politics ... - Google Books. Retrieved 7 September 2010. 
  4. ^ "Online Extra: "China Is a Private-Sector Economy"". BusinessWeek. 22 August 2005. Retrieved 7 September 2010. 
  5. ^ a b c Tucker, Noah (4 November 2007). "How China rises". 21st Century Socialism. Retrieved 7 September 2010. 
  6. ^ "Private health care with Chinese characteristics". Asia Healthcare Blog. 16 March 2009. Retrieved 7 September 2010. 
  7. ^ a b Tim Swanson (20 January 2009). "Long on China, Short on the United States". Ludwig von Mises Institute. Retrieved 7 September 2010. 
  8. ^ "How large is China's private sector?". 29 September 2005. Retrieved 7 September 2010. 
  9. ^ Hederman, Rea. "10 China Myths for the New Decade | The Heritage Foundation". Retrieved 7 September 2010. 
  10. ^ "China names key industries for absolute state control". China Daily. 19 December 2006. Retrieved 7 September 2010. 
  11. ^ Hederman, Rea. "Liberalization in Reverse | The Heritage Foundation". Retrieved 7 September 2010. 
  12. ^ Ramzy, Austin (9 April 2009). "China's New Healthcare Could Cover Millions More". TIME.,8599,1890306,00.html. Retrieved 7 September 2010. 
  13. ^ "The Role of Planning in China's Market Economy" (PDF). Retrieved 7 September 2010. 
  14. ^ "Reassessing China's State-Owned Enterprises". Forbes. 8 July 2008. Retrieved 7 September 2010. 
  15. ^ "InfoViewer: China's champions: Why state ownership is no longer proving a dead hand". 28 August 2003. Retrieved 7 September 2010. 
  16. ^
  17. ^ "Business | China grows faster amid worries". BBC News. 16 July 2009. Retrieved 7 September 2010. 
  18. ^ Market Economy and Socialist Road Duan Zhongqiao
  19. ^ a b China has socialist market economy in place (People's Daily Online, 2005).
  20. ^ a b "Reform of China's State-owned Enterprises A Progress Report of Oxford Analytica". Retrieved 7 September 2010. 
  21. ^ Scissors, Derek, Liberalization in reverse, (2009)
  22. ^ Bennhold, Katrin (25 January 2011). "Davos, 9 Years Into the Future". The New York Times. 
  23. ^
  24. ^
  25. ^
  26. ^ Notice -
  27. ^ By: C.J. Atkins. "The Leninist Heritage of the Socialist Market Economy". Political Affairs. Retrieved 7 September 2010. [dead link]

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